My accountant found that my ex rolled over $78,000 cap. gains from one home that was sold in 1986 into the rental townhouse in southern MD that I just got as part of a divorce settlement. My lawyer said, "oh, well" and refused to have my ex pay half of the $30,000 tax bill before our final court date.

I won't jump in the middle of your property settlement, but if you had an accountant advising your lawyer, I would think that the tax situation would have been considered in the overall property settlement. It sounds like that's blood under the bridge in your case, but it's useful for lurkers.

Now I understand that I may have a few options to possibly make the tax "ouch" hurt less. The townhouse is worth $150,000 with an $88,000 mortgage. The equity would be great if I didn't owe the $30,000!

I'm not sure where you're coming up with this $30,000; I suspect it's considerably more. What's your basis in the property? (It's basically what you paid for it in '86 minus the $78,000 deferred gain.) $150,000 minus the basis is the taxable gain on sale. (I assume we're not talking about your residence here.)

1. If I sell now I would lose most of the equity due to the $30,000 already owed and due to the current cap. gains that I would also owe on the property.

2. If I live in it for 2 years, then my cap. gains is reduced.

True. Unless the market goes haywire, the only taxable gain you'd have would be depreciation allowed or allowable since May 1997.

3. If I keep it until I am 55 (8 yrs. from now), I can take advantage of not having to pay capital gains...correct? Would I be able to get out of the old $30,000 cap. gains debt also?

This is the third time today that I've come across someone who knows about the over 55 one-time $125,000 exclusion, which was repealed in 1997, but doesn't know anything about the current law, which has been in effect for almost 7 years. Get a copy of IRS Publication 523 or check this board's FAQ and learn. I'm a little worried about that accountant who didn't tell you current law, too.

4. I own a piece of retirement property in FL that will be paid off in 2006. Can I roll the old $30,000 liability and whatever the new cap. gains would be, into the loan that I will then get to build a house?

No.

What would you do to ease the tax liabilities if you were in this situation??? I have been qualified to refinance it and then go live in it or I have to have it sold by 12-02.

On the surface it looks like the only way to turn this property into an asset rather than a liability is to live in it for 2 years. As noted before, assuming a sale price under $250,000, that would leave you with only some depreciation recapture as taxable income.

I urge you to get some competent advice on this. I'm making a lot of assumptions here.

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